F Risk, Information and Insurance

F Risk, Information and Insurance

Sponsored by THE GENEVA ASSOCIATION

Risk, Information and Insurance Essays in the Memory of Karl H. Borch Edited by Henri Louberge ~. " Kluwer Academic Publishers Boston / Dordrecht / London

Distributors for North America: Kluwer Academic Publishers 101 Philip Drive Assinippi Park Norwell, Massachusetts 02061 USA Distributors for all other countries: Kluwer Academic Publishers Group Distribution Centre Post Office Box 322 3300 AH Dordrecht. The Netherlands Library of Congress Cataloging-in-Publication Data Risk, information, and insurance: essays in memory of Karl H. Borch/edited by Henri Louberge; sponsored by the "Geneva Association". p. cm. Includes bibliographical references. ISBN-13: 978-94-010-7478-0 e-isbn-13: 978-94-009-2183-2 001: 10.1007/978-94-009-2183-2 1. Risk (Insurance) 2. Borch, Karl H. (Karl Henrik), 1919-1986. I. Borch, Karl H. (Karl Henrik), 1919-1986. II. Louberge, Henri. III. International Association for the Study of Insurance Economics. HG80S4.S.RS5 1989 368--dc20 89-15600 CIP Copyright 1991 by Kluwer Academic Publishers, Second Printing 1991, Softcover reprint of the hardcover 1st edition 1991 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher, Kluwer Academic Publishers, 101 Philip Drive, Assinlppi Park, Norwell, Massachusetts 02061.

Contents Contributing Authors Foreword Orio Giarini vii xi 1 Introduction Henri Louberge 2 Borch's Theorem: A historical survey of applications Jean Lemaire 15 Part I: Economics of Uncertainty 3 The role of securities and labor contracts in the optimal allocation of risk-bearing Jacques H. Dreze 4 Proportional risk aversion and saving decisions under uncertainty Georges Dionne, Louis Eeckhoudt, and Eric Briys 41 67 Part II: Economics of Information 5 The welfare economics of moral hazard Richard Arnott and Joseph Stiglitz 91

6 Problems of equilibria in insurance markets with asymmetric information Roland Eisen 7 Moral hazard and insurance market structure Yoram Eden and Yehuda Kahane 8 The effects of organizational form on capital structure: The case of stock and mutual property-liability insurance firms Prabir Datta and Neil A. Doherty 123 143 165 Part III: Economics of Insurance 9 Strategic growth and profit policy of insurance companies Dieter Farny 10 (De)regulation of insurance markets Lutgart van den 8erghe 11 Price regulation and segmented insurance markets J. Francois Outreville 12 The microstructure of the London insurance market Robert L. Carter and Stephen R. Diacon 13 Do shares in other insurance companies reduce the solvency margin of an insurer? Walter Karten Author Index Subject Index 185 199 221 231 257 269 271

Contributing Authors Professor Richard Arnott Department of Economics Boston College Chestnut Hill, MA 02167, USA Professeur Eric Briys Centre HEC-ISA Departement Finance 1, rue de la Liberation F-78350 Jouy-en-Josas, France Professor Robert L. Carter The University of Nottingham Depart. of Industrial Economics University Park GB-Nottingham NG7 2RD, United Kingdom Professor Prabir Datta 226 Harvill University of Arizona Tucson, AZ 85721, USA Professor Stephen R. Diacon The University of Nottingham Depart. of Industrial Economics University Park GB-Nottingham NG7 2RD, United Kingdom Professeur Georges Dionne Dep. de Sciences Economiques Universite de Montreal Case postale 6128, Succ. A Montreal/Quebec H3C 3J7/Canada VII

Vlll CONTRIBUTING AUTHORS Professor Neil Doherty University of Pennsylvania Wharton School of Commerce Department of Insurance 3641 Locust Walk CE Philadelphia, PA 19104, USA Professeur Jacques H. Dreze Center for Operations Research and Econometrics (CORE) Universite Catholique de Louvain 34, Voie du Roman Pays B-1348 Louvain-Ia-Neuve, Belgium Professor Yoram Eden Erhard Center Tel Aviv University Faculty of Management P.O. Box 3901 0 Ramat Aviv, Tel Aviv, Israel Professeur Louis Eeckhoudt Universite Catholique de Mons Faculte des Sciences Economiques Chaussee de Binche 151 B-7000 Mons, Belgium Prof. Dr. Roland Eisen Johann-W. Goethe Universitat Fachbereich Wirtschaftswissenschaften Mertonstrasse 17 0-6000 Frankfurt-am-Main, West Germany Prof. Dr. Dieter Farny Institut fur Versicherungswissenschaft an der Universitat zu Kbln Kerpener Strasse 30 0-5000 Kbln 41 (Lindenthal), West Germany Professor Orio Giarini The Geneva Association 18, chemin Rieu CH-1208 Geneve, Switzerland Professor Yehuda Kahane Erhard Center Tel Aviv University Faculty of Management P.O. Box 39010 Ramat Aviv, Tel Aviv, Israel

CONTRIBUTING AUTHORS IX Professor Walter Karten Universitat Hamburg Ordinariat for Allg. Bwl. und Versicherungsbetriebslehre Von Melle Park 5 D-2 Hamburg 13, West Germany Professor Jean Lemaire Department of Insurance University of Pennsylvania The Wharton School of Commerce 3641 Locust Walk Philadelphia, PA 19104, USA Professeur Henri Louberge Departement d'economie politique Universite de Geneve Case posta Ie 266 CH-1227 Carouge-Geneve, Switzerland Professeur J.-Franc;ois Outreville Programme special en assurance CNUCED/UNCTAD Palais des Nations CH-1211 Geneve 10, Switzerland Professor Joseph E. Stiglitz Department of Economics Stanford University Stanford, CA 94305-6072, USA Prof. Dr. Lutgart van den Berghe De Vlerick School voor Management Sint-Pietersnieuwstraat 184 B-9000 Gent, Belgium

Karl H. Borch 1919-1986

Foreword Orio Giarini The "Geneva Association" (International Association for the Study of Risk and Insurance Economics) was founded in 1973. The main goal was to stimulate and organize objective research in the field of risk, uncertainty, and insurance, in a world in which such issues were clearly becoming of greater and greater relevance for all economic actors. This was a pioneering effort, especially as economic theory and the teaching of economics were still anchored to the key notion of general equilibrium under an assumption of certainty. Thus, we had to start our work almost from scratch. One of the first initiatives was to bring together in Geneva, in June of 1973, all the academics in Europe already involved in risk and insurance economics. We found eight from five different countries who never had met before. This seminar chaired by Raymond Barre, the first president of The Geneva Association, was the first of an annual series that became known as the seminar of "The European Group of Risk and Insurance Economists." Since then more than 100 economists from most European countries as well as participants from two other continents and in particular from the United States have taken part in this seminar. Karl Borch participated for the first time at the third seminar held in Geneva in July 1976. From then on he was a driving force behind the maturation, extension, and the credibility of this group. He often participated as a speaker or discussant, and frequently gave advise on those to contact. On every occasion he was available and ready to help with a modesty which was as great as the fact that for most of these meetings he was the best example of what intellectual quality and scholarly achievement should mean. The consistent quality of his contribution led to his invitation to present Xl

xii RISK. INFORMATION. AND INSURANCE the Fourth "Annual Lecture," a series of lectures organized by the Geneva Association that was inaugurated by Kenneth Arrow and benefited from the contribution of various world-known economists such as Martin Feldstein, Joseph Stiglitz, Edmond Malinvaud, Robert Merton, Jacques Dreze, and others. It is therefore just and natural that the Geneva Association should honor his memory for his intellectual and his human qualities. Thank you Karl. And thank you also, Henri Louberge who has been with us in this endeavor right from the beginning.

Risk, Information and Insurance